Enthusiastic Reaction to ECB Liquidity Offer

European stocks and the euro all built on early gains Wednesday after an enthusiastic take-up of the European Central Bank’s latest liquidity offer.

There were 523 bidders at the ECB’s Long Term Refinancing Operation, which offers banks three-year loans at a discount against a wider-than-usual range of collateral.

The ECB lent €489.191 billion, the highest ever total for a three year operation. Analysts had anticipated that heavy demand would boost risk assets, and head off fears of a new credit crunch in Europe.

Estimates beforehand of how much banks would take varied from €200 billion of liquidity to €550 billion.

At 1045 GMT, the CAC-40 in Paris was up 1.3% at 3094.29, having climbed initially to 3121.29. Frankfurt’s DAX 30 had added 1.2% to 5917.95, just off the day’s 5965.35 high, while in London the FTSE 100 had gained 0.6% to 5451.18.

The euro made a new high for the day, and the week, of $1.3199 in the aftermath of the announcement, but has slipped back a few ticks since. At 1045 GMT, the euro traded at $1.3138.

Presumed haven assets sold off further, with the front-month March bund future down 35 ticks on the day at 137.15, having fallen to the day’s low of 136.69 immediately following the announcement.

Two year yields, which most closely match the liquidity horizon of the LTRO, were lower across Europe, but little changed after the announcement, suggesting the outcome had been largely in the price beforehand.

“In a nutshell, the auction has been considered as successful in terms of adding liquidity to the banking sector. We believe most of the take up has come from EMU periphery’s banks which have more problems with long-term funding,” said Annalisa Piazza, fixed-income strategist at Newedge Strategy.

However, some were more guarded in their welcome.

“The very heavy take-up of the ECB’s three year long-term refinancing operation (LTRO) provides some encouragement that banks’ liquidity needs are being amply met,” said Jonathan Loynes, chief economist at Capital Economics.

“While this might help to address recent signs of renewed tensions in credit markets and support bank lending, we remain sceptical of the idea that the operation will ease the sovereign debt crisis too as banks use the funds to purchase large volumes of peripheral government bonds,” he added.

After all, banks in the troubled economies have generally been cutting their exposure to sovereign debt in recent months, even as shorter-term borrowing from the ECB has risen.